Ticking Mortgage Timebomb

Borrowers on historically low fixed rates will have been watching the last 18 months with a mixture of shock and horror as the Bank of England rates rose. Those whose household incomes are already stretched with the cost of living crisis will be praying for something of a miracle in 2024, but it's unlikely rates will dip down soon, certainly not to levels they were 5 years ago. For many homeowners a big hike in mortgage costs is going to be another debt burden too far and it's not only in lower-income families that we'll see the impact. Lenders, brokers and borrowers need to brace themselves for the challenges ahead. The impact of money issues on mental health is going to be a double-whammy for a lot of families.

It starts with a Mortgage Timebomb, but this next year will be when the Car Leasing and Finance deals of recent years come back to bite - yes the School Run may be more comfortable in a brand-new SUV than a second-hand Focus Estate, but just wait until those monthly payments obliterate many re-mortgage options, just when they most need them. Borrowers need to take heed of Brokers who suggest starting a review process six months ahead of the mortgage deal ending!

The timebomb could be huge and potentially last for another year or two. When borrowers were obtaining fixed rates at 1% a few years ago, they were being stress tested at rates lower than today, but without the much higher costs of living we are now seeing. Add higher interest rates to higher living costs and the pain borrowers will suffer could be immense. This is why the government have been pushing the mortgage charter onto lenders, but this can only go so far.
Back in the early 90's, most borrowers had variable rate mortgages, which meant the pain was instant, but so was the slow cure. Today, the pain higher rates are meant to cause filters into the market much more slowly with most borrowers on fixed rates. This means the road to recovery is likely to take much longer.

Mortgage affordability has been stress tested by lenders for quite some time now, ie lenders have to assess mortgage affordability on the basis that interest rates will rise. So although 1.4m people will be faced with higher mortgage payments in 2024, in theory, this should be affordable to them. Although people certainly aren't going to be happy about this, especially in a general election year!

Anyone remortgaging next year will face eyewatering increases in their monthly payments. The economy is already on the brink of recession, now 1.4 million borrowers will have hundreds of pounds less a month to spend on the high street. It's a vicious cycle that will only make matters worse. But this is what you get when the economy is based on overinflated house prices.

The amount of very low existing fixed rates coming off a deal in 2024 is a frightening problem for a lot of mortgage account holders. There is a two-fold problem, firstly the rate shock/new monthly payment will be hard to facilitate in tight household monthly budgets. Secondly, if your existing lenders fixed rate replacement is ill-timed and not tracked by a qualified adviser for you - you could end up on the wrong deal, and indeed that deal could be higher than other more competitive lenders but the lender's now tightened affordability assessments don't allow you to apply to a new lender.

I'm not sure it's a ticking mortgage time bomb, but it may be a ticking car finance/credit card/personal loan/subscription service time bomb. UK households are generally very good at prioritising mortgage repayments over other spending, so I would expect many will forgo these other expenses before they would risk missing their mortgage payment. Many clients I have helped review their mortgage over the past year have been prepared for a jump in repayments, you'd have to have been living at the North Pole to not know mortgage interest rates aren't at 1% or 2% anymore, I've then been able to help them manage the increase by looking at options like increasing their repayment terms. In some cases, although a jump up, clients have been surprised at the level of the increase because they thought it was going to be much worse than it ended up being; it's certainly worth speaking to a mortgage broker to understand what level of increase you are looking at and what your options are.

While pinpointing the precise outcome remains challenging, it's reasonable to assert that ultra-low interest rates may have stretched affordability to its limits for many individuals. Consequently, the prospect of re-mortgaging at current rates undoubtedly raises concerns about a potential increase in defaults and repossessions among this demographic. The critical question now is the extent of this segment and its impact.